Statement by the IMF and the EC on Joint Discussions on a New Economic Program for Romania

Staff teams from the International Monetary Fund (IMF), the European Commission (EC), and the World Bank visited Bucharest during July 17–31. The mission has reached a staff-level agreement with the authorities on an economic program that could be supported by a 24-months Stand-By Arrangement (SBA) with the IMF, subject to approval by IMF Management and the Executive Board, and Balance of Payments (BoP) assistance from the European Union, subject to approval by the EU Economic and Financial Committee. Proposed access would total EUR 4billion, equally split between the IMF and the EU. The authorities intend to treat the arrangements as precautionary.

Romania’s economic recovery is expected to strengthen. After strong exports in the first part of the year, we now forecast real GDP to grow around 2 to 2¼ percent in 2013-14 with greater contributions from investment and domestic demand in 2014. The current account deficit is expected to continue to narrow, to around 2 to 2½ percent of GDP, and inflation is set to come down further, entering the central bank’s target band before end-2013.

A new economic program would build on the achievements of the previous programs that reduced large external and fiscal imbalances and advanced structural reforms, including the introduction of a new regulatory and pricing framework in the energy sector. In particular, the government seeks to (i) safeguard sound public finances, (ii) continue monetary and financial sector policies that preserve buffers and increase the resilience against external shocks, and (iii) reduce bottlenecks to potential growth through structural reforms.

To achieve these objectives, the program will focus on the following key areas. The authorities will proceed with gradual fiscal consolidation, with the aim of reaching a 2013 deficit target of 2.3 percent of GDP in cash terms and 2.4 percent of GDP in European System of Accounts (ESA) terms and achieving a structural deficit of not more than 1 percent of GDP by 2015. Fiscal policy will be underpinned by institutional reforms, including measures to foster medium-term planning, strengthen administrative capacity, accelerate the absorption of EU funds, strengthen tax administration and fiscal governance, and better control arrears. The authorities also plan to advance the health care reform agenda, which is crucial to improve the quality of health services, raise efficiency of spending, and ensure financial sustainability. Other structural reforms would focus on reforming inefficient state-owned enterprises and fostering investment and efficiency in the energy and transportation sectors, which are key to enhancing Romania’s competitiveness and boosting long-term growth. Financial sector policies will seek to strengthen bank balance sheets, in particular, by addressing the banks’ sizable non-performing loans, so as to support credit growth and the economic recovery.

For more information on Romania’s Stand-By Arrangements, please see the following links: